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Edited Transcript of METSO.HE earnings conference call or presentation 7-May-20 10:00am GMT

Q1 2020 Metso Oyj Earnings Call

Helsinki May 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Metso Oyj earnings conference call or presentation Thursday, May 7, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eeva Sipilä

Metso Corporation - CFO & Deputy to CEO

* Juha Rouhiainen

Metso Corporation - VP of IR

* Pekka Vauramo

Metso Corporation - CEO & President

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Conference Call Participants

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* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* Antti Kansanen

SEB, Research Division - Analyst

* Antti Suttelin

Danske Bank A/S, Research Division - Head of Research of Finland

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Magnus Kruber

UBS Investment Bank, Research Division - Associate Director and Research Analyst

* Max Yates

Crédit Suisse AG, Research Division - Research Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Juha Rouhiainen, Metso Corporation - VP of IR [1]

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Okay. Hello, everyone. This is Juha from Metso's Investor Relations, and I want to welcome you all to this conference call and audiocast where we discuss Metso's first quarter 2020 results that we put out earlier this morning. Results will be presented by our President and CEO, Pekka Vauramo; and CFO, Eeva Sipilä. And after the presentation, we'll be opening line for your questions.

Before we start, let me point out first the forward-looking statement slide in our presentation and also the slide which is noting about financial information and the fact that in our results, there are both IFRS numbers and what we call comparable financial information, which we are more pointing to and where our analysis is based in this presentation. And please note that we intend to limit the length of this call into 60 minutes.

With these words, we are ready to begin, and I'll hand over to Pekka. Please go ahead.

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Pekka Vauramo, Metso Corporation - CEO & President [2]

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Okay, thank you. Thank you, Juha, and welcome to this first quarter results call. We'll start from a couple of highlights from the first quarter. We had a strong start of the year and the quarter up until the COVID situation started to escalate. As we all recall, it started from China, and we have 5 plants -- manufacturing plants in China, and China being one of the important markets for us as well. And that, of course, affected our delivery capabilities during the first quarter, affected our sales, affected our order line in China, but not so much yet in the rest of the world.

We initiated cost and cash measures already in March, and they are now fully in place, have been in place almost fully throughout April already. So we were very fast doing that one, and we will get then the cost benefit in -- fully in second quarter. Also, I mean, we initiated the cash preservation actions. And those are ongoing and we'll see the results later on, on that one as well. Then the transformational process. Metso Outotec and Neles transaction is proceeding according to plan right now, and we're expecting to close it at the end of June, the transaction.

Then more on coronavirus situation. Yes, operations in China were really affected in February. We had, of course, all our factories and offices closed for the Chinese New Year, end of January, beginning of February. And that shutdown was extended, depending on plant and location and province in China, by another 2 to 3 weeks, and then the ramp-up was started.

Since that, the business has picked up in China considerably. China introduced an infrastructure package, CNY 40 trillion, and that is there already available. And especially in aggregates side, the market is booming and our local factory and business that we acquired fully some months ago, Shaorui, is clocking currently record months every month. So there's really some positive news and developments happening after the coronavirus in China right now.

Then the rest of the world started to escalate, as we know, in mid-March, and biggest impact we see in aggregates equipment at this moment. Mining equipment has continued on very strong and healthy level. And services, there are some limitations, some restrictions in access to the mine sites in some parts of the world. But mostly, our service continues still, but we will see some weakness and have seen some weakness in especially the field service part of the services. Customers have, at the same time, bought -- in preparation for possible supply shortages, they have bought consumables and certain spare parts, longer lead time spare parts in preparation for this possible supply shortages. So we have seen, in some areas, even some increase of sales because of the situation.

Then in Neles business, the Flow Control side. Yes, oil price is extremely volatile, and they have, of course, had an impact on that part of the market. While at the same time, the pulp and paper market is very active and has developed well overall.

Yes, we have lockdowns, as we know, in some of the countries. India and Mexico currently are having the biggest impact on us. But as of mid-April, India has allowed factories to start gradually and same is happening in South Africa. But there's still lockdowns in Peru and Mexico, and we have currently 2 factories, 1 in Peru and 1 in Mexico, that are closed. But we are capable of delivering from other factories similar products. So maybe some longer lead times and shipping times, but availability of products is currently good.

Service work, because of limited access and restricted access to some of the sites, is causing some issues for both in Minerals side and Neles' side. And on Neles' side, there has been postponements of maintenance shutdowns, and that is affecting the service business there and turning the mix somewhat weaker for us in valve side.

But then, when we move on to the overall group numbers, our orders grew by 5% from last year's first quarter to EUR 1,065 million. Most of the growth -- well, the growth is thanks to our acquisitions. Inorganically, the orders were almost flat. Sales were flat, and we need to remember here that there is the shutdown of Chinese factories and shutdown of Indian factory that is affecting this number and to some extent, the field service on these ones. But flat development from previous year on sales line.

Adjusted EBITA margin of 10.9%, EUR 91 million, which is down from 12.4% in last year. As an adjustment, we had EUR 11 million costs, primarily relating to Metso Outotec and Neles transactions that we have prepared during the -- continue to prepare during the quarter. Our cash flow started to improve and free cash flow was EUR 78 million.

And then if we look at close the Neles business first. The orders were unchanged at EUR 191 million. Good project activity overall, both in oil and gas and pulp and paper. But services, they declined, and that was the access issue and removal of scheduled shutdown services and so forth. So they meant that sales mix was somewhat weaker, affecting a little bit the margins in this side of the business.

Sales declined 12% to EUR 137 million in the quarter, and lockdowns in China and India were the main reasons on this one, plus then the services side. EBITA margin, down 1.2% to 14%, and for the mentions -- for the reasons mentioned above, plus, of course, the under-absorption, which is a consequence of the lockdowns and factory shutdowns.

Minerals side. Orders received up 6% to EUR 874 million. Mining orders continue to be on good level, healthy level. Aggregates equipment also grew, but that is thanks to McCloskey. We started to see the weakness in the second half of March in aggregates equipment. Services continued to grow and have had really strong months during the first quarter of the year.

Top line, almost flat, up slightly 2% to EUR 696 million, suffering a little bit from lockdowns and services affected by the virus situation and McCloskey, of course, contributing to that one. The same way as on order line.

Adjusted EBITA margin, 10.4%. We had good gross margin development but under-absorption because of several manufacturing locations being closed or were operating below the nominal capacity during the quarter. And in addition to under-absorption, we had also negative -- reasonably high currency impact or negative impact on our currency hedges during the quarter. That is a noncash, of course. And this is primarily because we do so much business in countries where the currencies are relatively weak and especially in shocks like the coronavirus are depreciating heavily, and therefore, the hedge book differences turn negative in a situation like this.

And then into the financials in detail. Eeva, please go ahead.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [3]

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Thank you, Pekka. Good morning, good afternoon to everyone on my behalf as well.

So we have published today, again, financial statements for the 2 companies we are creating. Firstly, the new Neles, becoming an independent listed company. And then secondly, Metso Minerals that will form the platform for the future, Metso Outotec. So I will provide some guidance on where to focus on in -- depending on your interest.

Post the EGM decision in late October to approve the demerger of Metso and the related transactions under IFRS, Metso has become Neles. IFRS, hence, already behaves as in post closing when the current Metso will change its name and become a focused valves and valves automation company.

So our sales, as reported under IFRS, for the 3 months totaled EUR 137 million, which is 12% down on -- from a year ago for the reasons Pekka already commented on, mainly COVID-19-related reduction of services sales as well as some lost sales in China for that same reason in mid-quarter. Under the official IFRS income statement, all of Metso Minerals has been squeezed into the rather uneventful [raw] labeled profit for the period for discontinued operations.

So in order to provide sufficient information for you, we have again prepared an additional set of analysis where you can see side-by-side the continuing Neles operations as well as the discontinued Metso Minerals operations and then their total, which then gives you the sales of EUR 832 million for the quarter.

Now as some of you may remember from our February call, there is a risk of confusion when it comes to profitability. When a business is labeled discontinued, all depreciation and amortization stops. In our case, the discontinued figures for Q1 do not include depreciation and amortization for Metso Minerals assets. For comparability with 2019, it is, of course, relevant to include both of those items for the period. Hence, the Metso comparable is the column you should be looking at when wanting compare like-for-like operational performance. You can see, when comparing the Metso comparable columns to the Metso total column, that there is an EUR 0.11 difference on earnings per share. And this is purely from this depreciation and amortization treatment between the 2 columns of EUR 0.46 and EUR 0.35 for the Metso comparable.

Now moving on to more of the comments on the substance. As Pekka already noted, we saw some impact on sales from COVID-19, but more impact actually from the abrupt lockdowns implemented mid-March that caused under-absorption at many of our factories. And then as well as the change in the fair value of derivatives from the rapid devaluation of many emerging market currencies that are important to us.

Now the latter I would note is a noncash item and also something that, by nature, will be recovered over time in product margins as the orders hedged will be delivered. However, recovery will come over a longer period of time. 6 months average in order to deliver is a pretty good proxy for us. And as I said, now we really saw an unprecedented impact very late in the quarter in a matter of days pulling the mark-to-market values significantly down.

Now moving on to the waterfalls on this slide, illustrate the organic and M&A-driven impact on our orders and sales. And then you also see the impact of exchange rates on both of the items. Now organically, orders were down 3%, while M&A, coming mainly from the acquisition of McCloskey, had a positive impact of 10%. Hence, headline orders were up by 5%. In sales, organic growth was minus 8% and the impact of structural changes was also 10% here, leading to basically flat sales year-over-year.

Moving then to the balance sheet items. So Metso's official IFRS balance sheet is very similar to the income statement. The itemized balance sheet assets and liabilities are all for Neles apart from the rows labeled either assets or liabilities of discontinued operations, which then relate to Metso Minerals.

Now our legal carve-out work is well-advanced, and hence, this balance sheet situation at the end of March illustrates much better the expected outcome at the end of June for Neles.

For comparable information on Metso as a whole, I recommend again for you to focus on the additional analysis provided in our release and specifically, the column, Metso comparable as the earlier explained difference in the treatment of depreciation and amortization of Metso Minerals affects not only the income statement, but naturally also the balance sheet values.

I would remind everyone of our HighService acquisition in May 2019 and McCloskey acquisition in the beginning of the fourth quarter of 2019 as they affect the comparability of the balance sheets year-over-year. So here, we are comparing the end of March up to the year-end.

Moving to cash. So the IFRS cash flow statement is a bit easier to read as it separates in the same statement at the top the profit contribution of continuing Neles and the profit contribution of discontinued Metso Minerals operations. And hence, this is thereafter fully comparable to the Q1 2019 cash flow statement. Now whilst the improvement in profitability was small, the positive release from net working capital during the first quarter of 2020 contributed to cash from operating activities being clearly better year-over-year.

Our capital expenditure is slightly up year-over-year. We were finalizing earlier growth investments while the figure still also had some impact of the demerger as we invested on IT tools to ensure the right platforms for future Neles at the time of closing. So we continue to expect CapEx this year will be clearly down from 2019 as we will have our growth investments behind us moving forward in the year.

On the analysis information, you can see the breakdown of the various rows between the continuing Neles operations and discontinued elements of Metso Minerals operations.

Metso's net working capital turned down in the quarter, ending at EUR 914 million. We finally saw inventory staying flat, while the amount of trade receivables and payables came down. Capital employed was up to EUR 2.7 billion due to the increase in liquid funds. We raised funds to finance the dividend payment, which was then not paid in the quarter as the AGM deciding on it had to be canceled abruptly due to the COVID-19 meeting restrictions coming into force in Finland. Now obviously, those funds are then available on the balance sheet when we -- the Board can again convene the AGM.

Now the key figures relating to return on capital employed and return on equity are both down in the period ending March 31 compared to year-end. Gearing, on the other hand, is down to 48.6%, while debt-to-capital rose slightly to 43.3%.

Now regarding our liquidity in the COVID-19 times we're living. I would like to draw your attention to the fact that we announced earlier today that we have, after the end of the quarter, agreed on additional financing with several banks totaling EUR 290 million in order to ensure ourselves of sufficient liquidity in preparation for the upcoming dividend payment as well as the demerger and closing of the Metso Outotec transaction in these uncertain COVID-19 times. We are confident that the additional facilities will provide a sufficient buffer in case the markets continue to be affected by the pandemic.

And with that, I would hand it back to our President and CEO, Pekka, please?

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Pekka Vauramo, Metso Corporation - CEO & President [4]

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Okay. Thank you, Eeva. Eeva has said already, I mean, Metso Outotec and Neles transaction is proceeding according to plan. We have had a lengthy antitrust clearance process, a process in more than 20 legislations. Globally, we still have a few more to go. But it's clearly approaching its end, and we are anticipating to get the clearances on time before end of June closing. The integration planning has gone well. We have a solid plan waiting for -- to be implemented, and that implementation will only start then, of course, on day 1 and then during the months following that one.

We have the organizational model in place already for future organization, but the appointments, we will have to wait until we are closer to getting the clearances. But we are well-advanced with these ones. And same applies to Neles' carve-out and all the background work that needs to take place for their independence, which will start then on the same day as Metso Outotec is formed. And we're expecting, like I said, I mean, June 30 closing of this transaction.

Then we continue to develop -- further develop our supply footprint. We announced a shutdown of one plant in South Africa. In this year, that is now stopped due to the lockdowns in South Africa. We cannot proceed with the formal process of negotiations in the country, but we'll continue those as soon as we -- the things turn more into normal in South Africa.

We opened new foundry in February this year in India. And this is foundry that will replace the capacity that we did shut down in last year in South Africa, and that foundry had the highest cost of our foundries, and we are replacing it now with the lowest cost of our Indian foundry. And this came just right -- at the right time when our foundry in China was forced to shut down because of the COVID-19. So good timing of that one.

And we'll continue to work on distribution center network. We have many warehouses, and we will consolidate that one to much smaller number, and that will make us more efficient and improve our service level to customers. We continue to invest in R&D, and that investment was at 2.6% of sales, EUR 5 million growth year-on-year on that one.

Then as far as the outlook is concerned, we will not estimate for the time being the development for the 6 months ahead. And this is for obvious reasons, because of the corona-19. And we are well into the second quarter now, and under these current circumstances, we expect the COVID-19 affect our business throughout the second quarter.

So with these ones, I think it's time to open for questions.

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Juha Rouhiainen, Metso Corporation - VP of IR [5]

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Operator, we will now take questions from the lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Klas Bergelind from Citi.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [2]

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Yes. Pekka and Eeva, it's Klas from Citi. I hope you're both well. First, a question on services in mining. Spares and wears were stable in the quarter and seems like field services took a bit of a hit in March. I'm trying to understand the exit rate, Pekka, for field services at the end of the quarter owing to the shutdowns. So was it down 10%? Or perhaps more? And how has this part of the business developed in April?

And then on wears and spares. What is your base case scenario that you're using when you're thinking about the second quarter? Is it financial crisis levels down 10% to 20% or something else? I will stop there.

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Pekka Vauramo, Metso Corporation - CEO & President [3]

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Yes. Of course, there are breakdowns that we don't discuss in that detail. But sort of, if I understood correctly, the exit level, the drop is not at all in the range of 10%. It's a smaller drop that we have seen in our services. So in general, and like I said earlier already, that we do see some strong buying in consumables, in some of the longer lead time spare parts. Customers are clearly stocking, having their own security stock at hand in anticipation of supply shortages. So we see strong sales in some areas. And then in those areas where customers have closed or are operating at lower rate, there we, of course, do see reduction correspondingly both in spare parts and in consumables. But the drops have not been really very dramatic yet at this moment.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [4]

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That is good to hear. My second one is on equipment orders in Minerals. First, on McCloskey,and your aggregates business on the conventional side. We see the conventional side in free fall, and I guess that's obviously China, India. Are you seeing any stabilization here currently in the beginning of the quarter in April? I mean China could more than affect the weakness in India right now, I would have thought, considering the stimulus.

And then on McCloskey. This business should benefit from U.S. now opening up quicker, I would have thought, if McCloskey sees strength in April. And then finally, on the mining side and equipment, the EUR 175 million of orders, obviously, that strength for us can be seen as quite backward-looking. And I was interesting to hear what have you seen on mining equipment in April.

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Pekka Vauramo, Metso Corporation - CEO & President [5]

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Yes. We are not at all in free fall in the aggregates. Of course, we are on clearly lower level than where we used to be. And it is sort of faster-cycle business. If construction activities are on lower level, it means that aggregates are not being consumed and needed, and the quarries do not stock their products so they stop producing. And under this kind of circumstances, fewer people are prepared to invest. But the situation has really stabilized during the April on a lower level, though, where we were earlier and what we would expect in the normal days.

We've seen slowdown throughout, probably the strongest slowdown in Metso-branded equipment. I mentioned already that in China, we see strong demand in -- from our local company there, Shaorui is the company and the brand. In China, they are making record months right now. And McCloskey, relatively, the drop hasn't been as big as with the Metso side.

Mining equipment, we had a strong first quarter in last year. So the comparison is not telling the full picture, what we do. We are clearly on a different level now in mining equipment than what we were in last year, in second, third and I would say, fourth quarter as well. So there have been some good orders, and pipeline looks still good. And then that pipeline is being worked fairly actively by us. And also, customers are still actively on those cases. So we really haven't seen so much slowdown in mining equipment.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [6]

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Okay. That's good to hear. Now because when I backed out McCloskey, it looked like the underlying business was down quite a lot. But you're saying aggregates is down, but it's not in free fall ex McCloskey?

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Pekka Vauramo, Metso Corporation - CEO & President [7]

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Not at all in free fall. Yes.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [8]

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Okay. No, that's good. My final one is on the margin in Minerals ex McCloskey. And if we back out the EUR 5 million from FX, the changes you had on derivatives at the end of the quarter, seems quite flattish, excluding that FX hit. And can you talk about, Pekka, the positive through margin in the quarter? We had services that were still solid. I assume that we still have benefits from better productivity as you're optimizing the supply chain. I'm interested in the moving parts ex McCloskey there for Minerals in the quarter.

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Pekka Vauramo, Metso Corporation - CEO & President [9]

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Yes, Eeva?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [10]

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Yes. Well, Klas, I think the separately provided Metso Minerals' financials, of course, give you some answers. They do indicate that the gross margin was actually slightly up, despite the inclusion of McCloskey. So clearly, sort of there's been good work in the offering and pricing and procurement type of areas. The challenges really came from the under-absorption. So I mean gross margin being slightly up despite, as I said, sort of several million hit on the -- from the under-absorption of the factories then for the 2 -- basically, 2 weeks in March. So I think that is -- in that instance, is relatively strong -- a strong achievement. But then the currencies, the actual impact was actually higher, but if -- there was some negative impact also a year back. So the sort of net difference is in that ballpark. But the -- then you're looking sequentially, then it was around double the number you were using.

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Operator [11]

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And the next question comes from the line of Max Yates from Crédit Suisse.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [12]

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Just my first question is around gold. And obviously, of all the commodity prices, this is the one that's seeing sort of more favorable price dynamic. So I just wanted to understand, if you look at the sort of balance of the year and conversations with customers, do you see any sort of change in behavior among your gold customers that is suggesting they will be kind of more positive and willing to pull the trigger on new investments in the balance of the year? That's my first question.

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Pekka Vauramo, Metso Corporation - CEO & President [13]

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Yes. That is -- it's obvious when looking at the gold price, and we have also booked some gold orders -- gold project orders now during the quarter, and we'll continue to do so most likely in near future. Gold price currently -- gold surprisingly took a sort of hit also in the first part of the crisis but has recovered and rebounded back on the same increasing trajectory where it was in the early part of this corona crisis. But -- so that is back on the precrisis level, I would say, and increasing trajectory as such.

We expect also some of the copper projects to continue and copper mining customers continue to invest. I mean now, of course, Peru, which is the second biggest copper producer in the world, they have had lockdowns there and mines were shut down. And that is, of course, affecting the situation there in the very short term and near term. But we're expecting both Peru and Chile to continue to invest in that side.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [14]

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Okay. And just my follow-up question is around the dividend. Could you comment on sort of how you're thinking about the dividend? Obviously, you've had the AGM postponed. Should we sort of think that a decision on this will come close to the time when you have visibility on the AGM? Or -- I just want to understand how you're thinking about the dividend at the moment.

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Pekka Vauramo, Metso Corporation - CEO & President [15]

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It's -- I mean the postponement of AGM was because the Finnish government introduced the restrictions on all public gatherings. And we were, in fact, I think, second company in -- second public company in Finland during that week -- when the restrictions were put in place, we were the second company to have AGM, and we ended up canceling that one. And our Board will issue a new invitation later in this month for the AGM. And then, of course, they will take a position on the dividend at that moment. I'm not expecting any change in that one. But like I said -- I mean it's up to our Board to then make a proposal to the AGM.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [16]

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Okay. And just the very final one is around the deal approval on Outotec. Obviously, you've sort of maintained the ambition of the closing date. Could you sort of talk a little bit about -- is the fact that we've not seen -- I think you've talked about previously that kind of delays so far in the approval have been more sort of a mechanical process of actually kind of getting your deal to the front of the queue, while others are kind of ahead of yours in terms of approval. Is that very much kind of still the case? And obviously, that process hasn't been helped by COVID. Or are there actually sort of further discussions around any sort of competition angles that have maybe sort of been thrown up by the process so far?

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Pekka Vauramo, Metso Corporation - CEO & President [17]

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There's been fairly rapid progress over the past few weeks. We don't feel at all that we are behind of some other clearances at this moment in any of the areas or countries where the approval is still to come. So that situation has improved quite a lot. And -- but we still have a number of places where we need to get the clearance, but the way how things are proceeding currently, we have all the reasons to be confident on end of June close for this one.

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Operator [18]

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And the next question comes from the line of Magnus Kruber from UBS.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [19]

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Magnus Kruber with UBS. I just wanted to follow up on Klas' point there on aggregates equipment. It seemed that, that came off quite a bit. I mean on my numbers, it's, I think, 40%, 50%. Is that completely wrong? Or how should we think about that?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [20]

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Well, I think that's maybe a bit on the high side. Certainly, it was a clear sort of -- a clear drop. I would perhaps sort of guide it for you for the sort of Q2 purposes that based on the sort of backlog situation and what we're seeing end of April that we would expect the aggregates sales to be perhaps some 15% down quarter-over-quarter.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [21]

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Okay. And year-over-year?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [22]

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Year-over-year, well, the quarter-over-quarter comparison is the better comparison because otherwise, you have the McCloskey impact confusing you with -- in a way, it's easier. But I would expect us to be slightly down also on year-over-year. But in a way, less down. The comparison is not fully sort of apples-to-apples.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [23]

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Okay. Okay, that's clear. And also, could you quantify the prebuy effect on aftermarket in Minerals, please? That would be very helpful.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [24]

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Well, perhaps it wasn't sort of -- it's huge in millions, but I think the point was really that we closed the quarter with sort of very well in line with expectations in both services and consumables. The only area where we really saw an impact was the field services side. And as the operations have been running, we have seen sort of good continued activity on both services and wears also in April.

But like, sort of Pekka mentioned, certainly, there, we did get sort of positive feedback from some customers on our ability to deliver when the sort of -- first, the China supply chain was down. And then the ramifications on the other countries, there was, of course, a lot of turbulence in the supply area and concerned customers on availability. So for sure, we won some additional business. But I think that's, as I said, sort of the -- doesn't -- is a good testimony to the fact that when we have such a global supply network, we are considered as a safe supplier that can deliver, and we can sort of move production from one factory to another in case of a lockdown with certain -- of course, some limitations. But nevertheless, that type of flexibility is something that we've -- we're really now sort of focusing on to make sure that we sort of maximize also the opportunities in this difficult situation.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [25]

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Got it. It's very clear. I guess, finally here, could you help us quantify the EBIT impact of the savings initiative you've taken so far as you get the full impact in Q2, but roughly what quantum should we think about there?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [26]

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Yes. Well, if we sort of -- I think what we've said, so we basically implemented on the personnel cost side either shorter working weeks or temporary layoffs or then up to sort of top management then salary cuts. And then, of course, the sort of related spending at travel and these type of costs are all out. So we are talking in Minerals about some EUR 20 million for the Q2. And then on the Neles side, it will be a single-million figure. But of course, in relation to their numbers, a visible support. And these are both in sort of 2% roughly of sales, so they will support the profitability. At the same time, obviously, we will have the full lockdown effect in April on the numbers, whereas we had only a partially -- a partial impact in Q1 in -- from mid-March.

But as Pekka already mentioned, as we now see the lockdowns easing, the situation improving, we actually have a lot of reason to expect that -- May to be much better, where, basically, also Peru now announced the lockdowns closing. So the only uncertain area is Mexico where the situation seems to be prolonged.

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Magnus Kruber, UBS Investment Bank, Research Division - Associate Director and Research Analyst [27]

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Perfect. And just a final bookkeeping one. Could you just help us with the FX impact or revaluation impact on EBIT from Minerals, please?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [28]

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Yes. Well, I believe there was a reference earlier in the call to a number about EUR 5 million. And that, as I commented, was if you compare year-over-year, that was kind of the additional negative impact. The actual number was higher if -- when compared sequentially. But as I said, it sort of kind of -- so the net impact year-over-year was roughly in that EUR 5 million ballpark.

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Operator [29]

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And the next question comes from the line of Andy Wilson from JPMorgan.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [30]

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I just have a couple of quick ones, hopefully. Just trying to get a sense on the Neles Flow Control side. Obviously, orders pretty good in the Q1. Just trying to get a sense of kind of how the conversations you're having with customers, and I guess particularly interested on the oil and gas side, sort of how -- what sort of indications they're giving you in terms of thought process around lower oil price? Obviously, appreciating that you have predominantly downstream exposure, so it's perhaps not as bad as in other areas. But just trying to get a sense of kind of how customers are thinking about the lower oil price and how that's impacting their spending plans.

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Pekka Vauramo, Metso Corporation - CEO & President [31]

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Yes. You are correct that we are more in the downstream and very little in what I would call a midstream exposure in oil and gas, and that midstream refers to U.S. transportation, and that has been -- that was already down in last year. So we are not starting from a high level at all in that one. So that part is certainly affected.

But then on the other hand, the downstream part, petrochemical refinery, there's strong activity ongoing. Some of the preparations for those projects, especially in Asia, were delayed during the first quarter, which means that maybe some order bookings will be delayed in that part of it. But we don't quite see that kind of weakness that we would otherwise read out of the oil price as we speak.

Then at the same time, the paper and pulp is going very strongly at this moment, and it's more of getting things supplied from our factories and having the logistics arrangements in place than anything else.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [32]

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That's very helpful. The -- and maybe this is just to clarify a couple of things on the Minerals service side. I think earlier on the call, you said that the sort of exit rate -- or kind of start of the Q2, Minerals service was down about 10% or maybe not as bad as 10%. I just wanted to check, was that a comment specifically around spares and consumables? Or is that spares, consumables and field services?

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Pekka Vauramo, Metso Corporation - CEO & President [33]

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That was more on field services. Spares and consumables have continued fairly unaffected, I would say, throughout, especially consumables, unaffected. And yes, maybe some mix changes in spare parts as such. But the field services is the one where the utilization rates are under pressure, and that is, of course, something we are following very closely, and then taking actions in -- to reduce our cost accordingly.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [34]

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Perfect. And maybe just -- and I think you've given us these numbers or at least indications previously. It would be helpful to get a sense of -- if you split the Minerals service, how much of it would be in spares and consumables and in field services? Just to give us even a starting point on the kind of quantum there.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [35]

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Yes. The consumables would be in the sort of 40% sort of range of the total. Field service has been more in the sort of 15%. So it's clearly a smaller part, but as I said, sort of, obviously, clearly then the area where we see the clearest impact. And obviously, in the field service numbers, a significant drop. But really when one then puts the whole Minerals services together, the overall situation was rather unaffected in the end for the quarter. And as I said, sort of we do continue to expect that as customers run the operations, the other areas will continue to see also a good need of the spares and wears.

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Operator [36]

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And the next question comes from the line of Antti Suttelin from Danske Bank.

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Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [37]

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If I listen to many industries, they -- many of them say that Q1 was not the bottom. Q2 will be much weaker. Then when I look at some of the mining companies, I observed that some of them have announced CapEx cuts. So I'm just kind of wondering your positiveness, you're basically saying that your Q1 mining equipment orders were flattish on a good level year-over-year and you are -- you sound really positive for Q2, 3 and 4 also. So I'm just double confirming if this really is your view that you think mining equipment will sail over this crisis without much impact.

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Pekka Vauramo, Metso Corporation - CEO & President [38]

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You tell me how long this crisis lasts, and then I will give you that answer. But currently, we have a good, good pipeline, and we did book well orders, and they are coming in as we speak. So of course, how long is this going to last? So that's guessing.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [39]

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And maybe to add. So as you may remember, but just for the benefit of others on the line, so of course, the majority of our business is smaller deals, smaller orders. And the diversification we have in the various minerals we serve also, obviously, helps. Gold was mentioned earlier in the call. So there are, of course, differences by customer and by minerals as well.

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Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [40]

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Yes. And on the aggregates side, would you say that Q2 would be -- should be better on the equipment order side than Q1 was?

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Pekka Vauramo, Metso Corporation - CEO & President [41]

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No. Not -- we are not expecting that to be. Certainly, Q2, we started from lower level -- from a level that we ended the March, and we're expecting that to continue through the quarter.

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Antti Suttelin, Danske Bank A/S, Research Division - Head of Research of Finland [42]

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All right. So aggregates really getting more -- much more hit than the mining equipment side?

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Pekka Vauramo, Metso Corporation - CEO & President [43]

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It is much more shorter cycle business than mining equipment.

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Operator [44]

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And the next question comes from the line of Antti Kansanen from SEB.

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Antti Kansanen, SEB, Research Division - Analyst [45]

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Yes. It's Antti from SEB. Just focusing on the cash flow and the net working capital release or the positive impact that you had on Q1, which kind of came from receivables and payables while inventories remained flat. Does the kind of the extraordinary situation with COVID somehow impact your net working capital? How should we think about going into Q2 and going into rest of the year notably on the inventory levels? And then kind of going from there, the cash generation in the coming quarters?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [46]

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Well, certainly, the pandemic is putting, as discussed earlier, a lot of pressure on the supply chain. So we had, of course, production and deliveries at the factories then that were under -- sort of closed for the lockdown that didn't leave the factories and were left in our inventory. And now -- and that, of course, has continued to be the situation in April as well that we don't sort of -- of course, when the operations are closed, we are not able to do much about the inventories. Then of course, we don't get sort of more payables into the factories either when the -- a country is closed. So there's pros and cons.

But I think there's sort of additional challenges to ensure logistics functioning and all that. So I think it will make our work on the inventory reduction slightly harder. But as I said then, of course, we are also trying to look at the opportunities to sell availability as we clearly see that not everyone in the market has the same type of a supply network that we have. So I'm, of course, hopeful that we're also able to sort of sell some of the inventory due to that. But overall, I would say, it does make predicting much tougher. We really sort of have to manage the supply and logistics on a daily basis. So talking 2 months ahead seems very far away right now.

Obviously, then on the trade receivables, as in any crisis, one has to be very careful on not getting problems. So being in active dialogue with customers is, of course, sort of, first, what one does in a crisis like this, and all of those actions have been in place for many weeks now.

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Antti Kansanen, SEB, Research Division - Analyst [47]

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Yes. I'm just thinking that the working capital improvement or the cash flow improvement was quite of a focus point for this year. And now if we kind of assume some kind of a normality after Q2, is it -- should we expect kind of a reversal of the positive trend seen so far as your production returns to more normal? Or are you working on kind of releasing more from there? Just any ballpark guidance on that.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [48]

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Yes. We absolutely haven't given up on our targets. And sort of the organization has also their incentives tied on these items. So the focus will be -- but I was just saying that -- commenting on the Q2 that there, of course, is a bit difficult to comment on as these supply chain movements are somewhat unpredictable.

If -- but for the full year, then definitely, the focus is on reducing our inventories. And then receivables, payables will very much follow the top line. And of course, now when we do see top line coming down because of the pandemic, that, of course, then also does give some sort of easing and sort of -- some sort of -- some help to the net working capital, as you well know then when the cycle turns that way.

So it's -- there's pros and cons. It's just very difficult to put them all together at this point. But I'm sure sort of 1 -- even 1, 2 months, and we will see much better the sort of impact of the pandemic, and hopefully, the supply situation then kind of starts to settle as well as we get rid of these lockdowns and those impacts.

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Antti Kansanen, SEB, Research Division - Analyst [49]

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Okay. That's clear. The second question, coming back to the aggregates side and specifically on McCloskey. Maybe this was mentioned already, but how did its orders kind of trend year-over-year if you compare the orders that they booked now compared to Q1 last year?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [50]

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Well, also the McCloskey business as well as the Metso business was down from a year ago. But relatively speaking, I would say that their performance was okay in the circumstances. But as I said, clearly, the traditional Metso business was really impacted from the situation in India, which is a big market for us. That, of course, is not really a market for McCloskey. That's more sort of Europe and North America. So it was perhaps also where the pandemic was really affecting in Q1, and as Pekka already said. So obviously, we do expect Q2 to be a tougher quarter for the business as a whole when the sort of pandemic is now -- has been now prevailing in the sort of other key market areas, North America and Europe, to name a few.

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Antti Kansanen, SEB, Research Division - Analyst [51]

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Okay. And then the last question on Neles. Here, demand outlook on various geographies and kind of end markets was already discussed. But how about kind your business in APAC? And kind of the chemicals sector coming from the shutdowns you've seen on Q1 going into late Q1 and now on Q2, how should we think about those businesses?

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [52]

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Well, I think Asia Pacific as a whole, we have seen it influenced more from the sort of pandemic in the earlier part of the quarter with China, and we have seen sort of recovery in that area. But of course, as discussed, the sort of oil prices, and these are global items affecting all players. But perhaps the sort of market situation because of pandemic was on the improving track towards the end of the quarter and that helped.

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Operator [53]

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The next question comes from the line of Robert Davies from Morgan Stanley.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [54]

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Yes. Just 2 short ones. First one was just on -- a follow-up on Neles comments, just around the aftermarket part of that business. How long is it sort of typically possible for customers to push out those sort of deferrals and doing the aftermarket work? I just wondered how much of the business was fixed into long-term sort of contracts and regular maintenance. I guess, how long is the sort of typical pushout that you can go before your -- they're effectively, through compliance, forced to do some sort of service or upgrade work?

And then the second one was really just around thinking kind of big picture on the mining side of the business, just around the cost footprint. Has the sort of idea of reshoring or changing the supply chains changed your views of either your manufacturing footprint or the way you sort of structure the business post the transaction with Outotec at all?

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Pekka Vauramo, Metso Corporation - CEO & President [55]

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Yes. Postponing maintenance shutdowns, it varies quite a lot industry-by-industry. In some areas, there might be regulations -- safety regulations that are very much dictating when customers need to do the overhaul. In some areas, it's based on risk management approach and risk -- being risk of shutdown. And in some areas, it is just seasonality that certain things can't be done, take for example, in the summertime rather than in -- during the winter. So this very much depends on customers. But I would say that in no case, it's longer than 1 year, which is then the seasonality impact. And normally, we talk about months. So it is a small, short transition that we talk about here.

And the question on mining equipment, sorry, what was that again?

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [56]

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Yes. Sorry, that was just in terms of your manufacturing footprint or your kind of cost footprint, how you're thinking about that in terms of potentially reshoring or changing the supply chain route that you currently use. Are you -- have you sort of changed your view on the layout of where you grow your business near production sort of post the transaction on the back of COVID?

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Pekka Vauramo, Metso Corporation - CEO & President [57]

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COVID has slowed down a little bit the restructuring of our footprint in the supply side and especially the manufacturing part, but because some of the plants we needed to keep running because the others were closed. But as a such, the plan hasn't changed. Then in mining equipment side, we are very much in the outsourced model. We have very little in-house manufacturing in that one. What we do see, however, going forward and especially with the merger is that we will move some of our supplies to lower-cost environment. We are still procuring too much close to where our engineering is based, i.e., either in Europe or in North America. So we do have that potential out there still.

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Operator [58]

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And we have one follow-up question from the line of Klas Bergelind from Citi.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [59]

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Yes. So Pekka, I want to come back to the dividend. One of the reasons why it's higher this time is because of -- this is part of the deal with Outotec, and the merger already has shareholder approval. Does it make it more difficult for the Board to change that dividend proposal now when they will send out a new invitation for the new AGM? I'm trying to understand to what extent this dividend is more secure versus others that have changed the proposal or even canceled the dividend. Because you say that part of the reason for the increased funding is to pay the dividend, I just want to get a clarification there.

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Pekka Vauramo, Metso Corporation - CEO & President [60]

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Yes. Of course, in this kind of transaction that we are doing, how much we carry cash into the new and how much cash goes into Neles and how much is paid out before the transaction as dividend, I mean, it changes the value of the parts. And of course, valuation is a key -- one of the key things in any transaction like this. And of course, we need to make sure that -- so that Metso shareholders are sort of -- their interests are well looked after under these kind of circumstances.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [61]

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Okay. That's very clear. My second follow-up is on the synergies with Outotec. When we met in February, you alluded to that the ongoing work in the integration teams had identified much bigger savings than the initial EUR 100 million. And now just to the answer to the previous question, you said that you're sourcing potential outside of sort of Europe, U.S. and you've discovered at the Outotec. Would you still subscribe to that view that there is upside to that EUR 100 million?

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Pekka Vauramo, Metso Corporation - CEO & President [62]

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There is upside to that one. And we will communicate then after day 1 when we publish the integration plan, more in detail and in a granular manner later on.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [63]

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Okay. Very good. Very quick final one for you, Eeva. You said there on the savings that the impact -- I'm not sure if I heard it correctly, you said something about 2% worth of savings. Was that including the short-time working and the temps leaving that we should expect for the second quarter? I'm trying to understand the short-term savings that will then obviously reverse when you go into 2021.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [64]

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Sure. So I was talking about that Q2 impact as most of the measures we have agreed as temporary for the time being. And the numbers I had were -- was EUR 20 million for Metso Minerals and then a single-digit million figure for the Neles side. And the 2%, I was just actually referring that if you then ballpark sort of how much is that over sales, that's kind of -- you get to a 2% of sales roughly level. So that is where the -- those were my comments really on the Q2.

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Operator [65]

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As there are no further questions, I'll hand it back to the speakers.

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Juha Rouhiainen, Metso Corporation - VP of IR [66]

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All right. Thanks, everybody, for participating and asking questions. This concludes our conference call and Q1 2020 results commentary. We'll be back with half year or Q2 results on August 5. And before that, of course, as discussed, we'll have AGM and most likely, the closing of the transaction. So a lot of interesting events coming up. In the meantime, we say thank you this time and stay healthy, and take care. Bye-bye.

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Eeva Sipilä, Metso Corporation - CFO & Deputy to CEO [67]

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Thank you. Bye-bye.

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Pekka Vauramo, Metso Corporation - CEO & President [68]

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Thank you.